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AMERICAN  INSTITUTE  OF  ACCOUNTANTS 


BOARD  OF  EXAMINERS 


Questions  Set  for  Examinations,  June,  1917 


Price  Ten  Cents 


20  VESEY  STREET,  NEW  YORK 


N 


Copyright,  1917,  by 
THE  AMERICAN  INSTITUTE  OF  ACCOUNTANTS 


AMERICAN  INSTITUTE  OF  ACCOUNTANTS 


BOARD  OF  EXAMINERS 


Auditing* 

JUNE  14,  1917,  9  A.  M.  TO  12.30  P.  M. 

The  candidate  is  required  to  answer  all  of  the  follow- 
ing questions: 

1.  What  do  you  understand  to  be  meant  by  a  balance  sheet 

audit  ?    What  is  its  scope  ? 

2.  The  officers  of  a  company  of   which  you  are  the  auditor 

elected  by  the  stockholders  submit  to  you  for  audit  a  bal- 
ance sheet  in  which  the  following  item  appears : 

Miscellaneous   reserves    (including 
premium  on  stock) $248,000.00 

On  investigation  you  find  the  item  is 
made  up  as  follows : 

General  reserve $86,000.00 

Operating  reserves 6,000.00 

Provision  for  plant  depreciation 46,000.00 

Provision    for   amortization    of   lease- 
holds    40,000.00 

Provision  for  bad  debts 36,000.00 

Premium  on  capital  stock  sold 34,000.00 


$248,000.00 

Wihat  recommendation  would  you  make  to  the  officers  and 
what  course  would  you  take  if  your  recommendation  were 
not  followed? 

3.  In  auditing  the  accounts  of  a  corporation,  for  the  first  year 
of  its  existence,  what  records  and  documents  should  be 
examined  in  addition  to  the  books  of  accounts  and  the 
vouchers  ? 


'Questions  in  auditing  were  the  same  for  both  classes  of  applicants. 


4.  What  steps  should  >an  auditor  take  to  ensure,  as  far  as  pos- 

sible, that  accounts  presented  to  him  for  audit  contain  all 
the  liabilities  of  the  company? 

5.  You  are  appointed  auditor  of  a  charitable  institution  sup- 

ported by  annual  subscriptions  and  other  gifts.  What 
steps  would  you  take  to  verify  the  accounts  submitted  to 
you.  Draft  a  certificate  such  as  you  would  give  if  the 
results  of  your  audit  were  entirely  satisfactory. 

6.  To  what  extent  do  you  think  it  is  necessary  to  verify  the 

outstanding  capital  stock  of  a  corporation  and  what  pro- 
cedure would  you  follow  in  such  verification? 

7.  State  what  you  consider  to  be  the  most  important  special 

problems  arising  in  one  of  the  following  classes  of  audits 
and  how  you  would  deal  with  such  problems : 

(a)  Stock  brokers. 

(b)  Moving  picture  producers. 

(c)  Breweries. 

(d)  Clubs  and  institutions. 

(e)  Retail  stores. 

(f)  Land  companies. 

(g)  Executorship  accounts. 

8.  What  steps  should  be  taken  to  verify  the  cash  balance  ap- 

pearing on  a  balance  sheet  of  a  company  in  whose  cash 
book  bank  and  cash  transactions  are  kept  together  where 
the  auditor  has  not  had  the  opportunity  of  making  the 
verification  on  the  date  of  the  balance  sheet?  To  what 
points  should  special  attention  be  given? 

9.  What  is  meant  by  a  qualified  certificate  ?    Give  an  illustration 

of  a  case  in  which  a  qualified  certificate  might  properly  be 
given  and  draft  a  qualification  applicable  to  that  case. 

10.  An  inventory  is  submitted  to  you  certified  by  the  manager  of 
a  business.  Mention  some  of  the  principal  steps  you  would 
take  to  confirm  the  correctness  of  the  inventory  figure 
appearing  in  the  balance  sheet. 


AMERICAN  INSTITUTE  OF  ACCOUNTANTS 


BOARD  OF  EXAMINERS 


Commercial  Law 
JUNE  14,  1917,  1.30  P.  M.  TO  4.30  P.  M. 

The  candidate  may  select  any  ten  of  the  questions  sub- 
mitted but  must  not  answer  more  than  ten.  The  intelli- 
gence disclosed  by  the  answers  will  materially  affect  the 
markings. 

1.  State  all  the  legal  requisites  of  a  valid  sale. 

2.  What  is  the  provision  of  the  statute  of  frauds  with  respect 

to  sales  of  goods,  wares  and  merchandise? 

3.  Define  or  describe  void,  voidable  and  unenforcible  contracts. 

4.  What  simple  contracts  are  required  to  be  in  writing  ? 

5.  A  contract  executed  and  delivered  in  California  is  the  sub- 

ject matter  of  a  suit  in  New  York.  What  laws  will  govern 
the  validity  of  the  contract,  and  what  laws  will  govern 
the  remedy?  State  the  rule  in  such  cases. 

6.  State  all  of  the  essential  legal  requirements  of  a  contract 

constituting  a  valid  negotiable  note. 

7.  Are  the  following  notes  negotiable  or  not?    Give  reasons. 

(a)  No  date,  nor  place. 

I  promise  to  pay  to  bearer  One  Hundred  Dollars. 

Signed      A.  B. 


(b)  January  5,  1917. 

Due  A.  B.  or  order  on  demand  One  Hundred  Dollars. 

Signed       C.  D. 


Chicago,  Sept.  5,  1916. 

On  or  before  Dec.  1,  1916,  I  promise  to  pay  to  C.  D.  or 
order  One  Hundred  Dollars. 

Signed      A.  B. 


'Questions  in  commercial  law  were  the  same  for  both  classes  of  applicants. 


(d)  New  York,  April  10,  1916. 

On I  promise  to  pay  to  the  order  of  C.  D. 

One  Hundred  Dollars. 

Signed      A.  B. 


8. 

New  York,  April  10,  1916. 

Thirty  days   after  date   I   promise   to  pay  to   the   order  of 
C.  D.  One  Hundred  Dollars. 

Signed      A.  B. 

Endorsed  in  blank  "without  recourse."  C.  D. 

What  does  the  endorser  warrant  by  his  endorsement  ? 

9.    What  is  the  legal  significance  and  effect  of  the  word  "nego- 
tiable" when  applied  to  commercial  instruments? 

10.  What  is  considered  a  reasonable  time  for  the  presentation  for 

payment  of  a  check? 

11.  Under  what  circumstances  may  a  director  incur  a  personal 

liability  in  respect  of  dividends  paid  by  a  corporation? 

12.  To  what  extent  are  dividends  received  by  (a)  an  individual 

and  (b)  a  corporation  subject  to  payment  of  tax  by  the 
recipients  under  the  income  tax  law  of  1916? 

Answers  to  the  following  questions  may  be  based  on 
any  statute  of  any  state  or  on  the  principles  fundamental 
to  all  corporations,  in  the  absence  of  any  statute: 

13.  Have  directors  of  a  corporation  the  right  to  rescind,  alter  or 

amend  by-laws  adopted  by  stockholders?  If  so,  state 
under  what  conditions.  If  not,  why  not? 

14.  To  what  extent  may  directors  delegate  their  powers  to  an 

executive  committee?    Give  reasons  for  your  answer. 

15.  Have  directors  the  power  to  vote  or  pay  increased  salaries 

to  officers  for  past  services  rendered  in  the  usual  and 
ordinary  course  of  business?  Give  reasons  for  your 
answer. 

16.  How  far  are  by-laws  binding  upon  strangers : 

(a)  When  they  have  no  notice  of  them? 

(b)  When  they  have  notice  of  them? 


AMERICAN  INSTITUTE  OF  ACCOUNTANTS 

BOARD  OF  EXAMINERS 


Examination  for  Admission  as  Member 


Accounting  Theory  and  Practice — Part  I. 

JUNE  15,  1917,  9  A.  M.  TO  12.30  P.  M. 

Candidates  arc  required  to  answer  questions  one  and 
tzvo  and  one  of  the  three  remaining  questions  but  no 
more. 

A,  B  and  C  formed  a  partnership.  A  agreed  to  furnish 
$10,000,  B  and  C  each  $7,000.  A  was  to  manage  the  busi- 
ness and  receive  one  half  of  the  profits ;  B  and  C  were  each 
to  receive  one  fourth.  A  supplied  merchandise  worth 
$8,500.  but  no  additional  cash.  B  turned  over  to  A,  as  man- 
aging partner,  $9,000  cash,  and  C  turned  over  $5,500.  The 
business  was  conducted  by  A  for  some  time,  but  without 
keeping  exact  books.  While  managing  the  business  A  pur- 
chased additional  merchandise  amounting  altogether  to 
$75,000  and  made  sales  of  $100,000.  The  cash  received 
and  paid  out  for  the  partnership  was  not  kept  separate 
from  A's  personal  cash.  In  order  to  straighten  out  matters, 
B  took  over  the  management.  He  found  receivables 
amounting  to  $20,000,  and  of  these  he  collected  $4,500. 
The  merchandise  still  on  hand  he  sold  for  $500.  These 
receipts  he  deposited  in  a  bank  to  the  credit  of  the  firm. 
The  remaining  accounts  proved  worthless.  The  outstand- 
ing accounts  payable  amounted  to  $2,000,  of  which  $1,500 
had  been  incurred  in  purchasing  merchandise  and  $500  for 
expenses.  These  accounts  he  paid.  A  presented  vouchers 
showing  that  during  his  management  he  had  paid  other 
expenses  of  $2,400.  By  mutual  agreement  B  was  held  to 
be  entitled  to  $100  on  account  of  interest  on  excess  capital 
contributed  and  A  and  C  were  to  be  charged  $75.00  each 
for  shortage  in  contribution  of  capital. 


(a)  Prepare  trading  and  profit  and  loss  accounts  and  ac- 
counts of  each  of  the  partners,  indicating  the  final  adjust- 
ment to  be  made  in  closing  up  the  partnership,  (b)  Show 
how  the  above  final  adjustment  would  be  modified  if  A 
proved  to  have  no  assets  or  liabilities  outside  the  part- 
nership. 

2.    Write  a  reply  to  the  following  letter  and  prepare  a  statement 
as  requested  therein: 

Dear  Sir:  SMITH  AND  JONES. 

Our  bank  has  asked  us  for  a  statement  for  credit  purposes. 
Will  you  please  prepare  one  for  us? 

Our  plants  stand  at  their  cost  price,  which  is  $60,400.  We 
have  set  up  a  reserve  for  depreciation  of  $10,200.  There  is  a 
mortgage  for  $20,000  on  the  plant  and  interest  on  the  mortgage 
is  at  6  per  cent  and  is  paid  up  to  3  months  ago.  We  hold 
$10,000  of  notes  receivable  and  have  discounted  $25,000  of 
notes  with  the  bank.  Our  accounts  receivable,  which  we  con- 
sider good,  amount  to  $18,000,  including  $3,000  due  from  one 
of  our  employees  on  personal  account.  Our  trade  accounts 
receivable  are  subject  to  5  per  cent  discount  if  paid  at  due 
date,  and  only  $1,000  is  now  past  due.  Our  accounts  in  sus- 
pense amount  to  $4,000.  I  believe  these  are  50  per  cent  good. 
We  have  ordered  a  new  machine  to  cost  $6,000,  but  it  has  not 
yet  been  delivered.  We  have  endorsed  a  note  for  $6,000  for 
our  friends,  the  A.  B.  Co.,  but  I  am  confident  they  will  take 
care  of  it  when  it  is  due.  Our  accounts  payable  amount  to 
$4,200.  Our  insurance  amounts  to  $400  a  year  and  has  six 
months  to  run.  We  have  a  note  at  the  bank  for  $5,000,  inter- 
est paid  to  date.  We  own  50  shares  of  stock  in  the  company 
from  which  we  buy  raw  material.  They  cost  us  $2,800  and 
are  surely  worth  it,  though  we  might  have  some  difficulty  in 
selling  them  in  a  hurry.  Our  inventory  is  taken  at  a  low 
selling  price,  which  is  10  per  cent  more  than  it  cost  us.  The 
amount  is  $17,600.  In  addition  we  have  a  special  contract  for 
one  of  our  customers.  The  contract  price  is  $25,000.  We 
have  spent  $12,000  on  it  and  expect  to  have  to  spend  $4,000 
more,  and  we  have  received  $10,000  on  account.  Our  cash  in 
bank  is  $4,800  and  cash  in  hand  $200. 

I  have  told  you  all  the  facts  I  think  you  need.  Perhaps 
some  are  not  required,  but  I  want  to  give  the  bankers  all  the 
information  they  ought  to  have  in  the  way  they  expect  to 
get  it. 

I  do  not,  of  course,  expect  you  to  accept  any  responsi- 
bility for  the  figures  in  the  statement,  but  simply  to  prepare 
the  statement  in  the  best  form  you  can  from  this  letter.  If 
you  have  any  suggestions  as  to  how  I  can  better  meet  the 
bank's  requirements  let  me  have  them. 

(Signed)       H.  A.  SMITH. 


3. 


BALANCE  SHEET  OF  A. 


Property    leases    and 

goodwill $470,133 

Fixtures  81,791 

Merchandise  inventory..  126,538 

Sundry  debtors 54,642 

Sinking  fund  assets 11,690 

Cash  on  hand 20,204 


$764,998 


Capital  stock $400,000 

Bonds  100,000 

Sundry  creditors 59,975 

Surplus 135,886 

Pension  fund 5,460 

Sinking  fund 11,690 

Profit  and  loss 51,987 


$764,998 


BALANCE  SHEET  OF  B. 


Cash  $51,195 

Investments: 

Short  time  loans 108,000 

Stock  of  A  at  par 100,000 

Stock  of  C  at  par 20,000 

Bonds    of    Company    A 

at  par  (cost) 50,000 

Railroad    and    other 

bonds  at  present  value  126,070 

Merchandise    366,437 

Sundry  debtors 15,563 

Prepaid  expense 12,715 

Goodwill    and    trade 

marks   422,900 

Plant  and  machinery...  173,337 


$1,446,217 


Preferred  stock $800,000 

Common  stock 123,000 

Surplus   160,000 

Accounts  payable 141,235 

Notes  payable 4,728 

Profit  and  loss 217,254 


$1,446,217 


BALANCE  SHEET  OF  C. 
Land  and  buildings $41,438  Capital  stock $120,000 


Machinery  20,577 

Merchandise   19,610 

Office  furniture 50 

Cash  14,730 

Accounts  receivable 21,245 

Goodwill  at  cost 81,867 

Bonds    of    Company   A, 

5,000  at  cost 5,030 


$204,547 


Bonds  30,675 

Surplus   34,000 

Dividend  declared 1,650 

Accounts  payable 5,879 

Profit  and  loss 12,343 


$204,547 


Company  D  is  organized  for  the  purpose  of  consolidating 
the  three  companies  whose  balance  sheets  are  given  above, 
engaged  in  allied  businesses.  Company  D  is  authorized  to 
issue  $2,000,000  preferred  stock,  and  $350,000  common 
stock.  It  arranges  to  buy  stock  of  the  subsidiary  companies 
on  the  following  terms : 

FOR  EACH   SHARE  OF  Is  OFFERED  OF 

D.  Preferred  Stock        D.  Common  Stock 

A.  stock  1  share  J4  share 

B.  preferred  2  shares 

B.  common  1  share 

C.  stock  1  share  %  share 

On  these  terms  D  acquires  $290,000  of  A  stock,  all  the  pre- 
ferred stock  of  B,  $100,000  of  common  stock  of  B,  and 
$100,000  of  C  stock-  The  stock  bought  was  obtained  from 
individual  holders,  the  stock  of  A  and  C  held  by  B,  as  well  as 
some  stock  held  by  non-consenting  stockholders,  not  being 
acquired.  The  remaining  preferred  stock  of  D  was  held  by 
the  company.  The  rest  of  the  common  stock  authorized  was 
sold  for  cash  at  par.  The  expenses  of  organization  amounted 
to  $5,000  and  were  paid  in  cash. 

Of  the  accounts  receivable  held  by  C,  $20,000  were  due 
from  B.  Of  the  sundry  debtors  on  the  books  of  B,  $5,500 
were  due  from  A. 

Company  D  also  issues  $500,000  bonds  which  it  sells  at  105 
and  pays  $500,000  cash  for  a  plant  which  it  buys  direct. 

Prepare  a  consolidated  balance  sheet. 

4.  A,  B  and  C  were  in  partnership,  A's  capital  being  $90,000, 
B's  $50,000,  and  C's  $50,000.  Their  agreement  is  to  share 
profits  in  the  following  ratio:  A,  60%;  B,  15%;  C,  25%. 
During  the  year  C  withdrew  $10,000.  Net  losses  on  the 
business  during  the  year  were  $15,000,  and  it  is  decided  to 
close  out  the  business.  It  is  uncertain  how  much  the  assets 
will  ultimately  yield,  although  none  of  them  is  known  to 
be  bad.  The  partners  therefore  mutually  agree  that  as  the 
assets  are  liquidated,  distribution  of  cash  on  hand  shall  be 
made  monthly  in  such  a  manner  to  avoid,  so  far  as 
feasible,  the  possibility  of  paying  to  one  partner  cash  which 
he  might  later  have  to  repay  to  another.  Collections  are 


made  as  follows:  May,  $15,000;  June,  $13,000;  July, 
$52,000.  After  this  no  more  can  be  collected.  Show  the 
partners'  accounts,  indicating  how  the  cash  is  distributed  in 
each  instalment,  the  essential  feature  in  the  distribution 
being  to  observe  the  agreement  given  above. 

5.  A  machine  costing  $81.00  is  estimated  to  have  a  life  of  four 
years,  with  a  residual  value  of  $16.00.  Prepare  a  statement 
showing  the  annual  charge  for  depreciation  according  to 
each  of  the  following  methods: 

(a)  Straight  line. 

(b)  Constant  percentage  of  diminishing  value. 

(c)  Annuity  method. 

(For   convenience   in    arithmetical    calculation    assume    the 
rate  of  interest  to  be  10  per  cent.) 

Discuss  the  significance  of  each  of  the  methods. 


AMERICAN  INSTITUTE  OF  ACCOUNTANTS 


BOARD  OF  EXAMINERS 


Examination  for  Admission  as  Member 


Accounting  Theory  and  Practice— Part  II. 

JUNE  15,  1917,  1.30  P.  M.  TO  4.30  P.  M. 

Candidates  are  required  to  answer  six  of  the  following 
questions  but  no  more. 

1.  A  corporation  was   formed   which  acquired   several   plants, 

issuing  therefor  $17,000,000  bonds  and  $24,000,000  stock. 
It  was  well  known  at  the  time  that  this  capitalization  ex- 
ceeded the  true  value  of  the  assets  (including  goodwill) 
acquired,  to  an  extent  of  $11,000,000.  In  the  first  year,  after 
paying  expenses  and  interest  on  bonds,  the  business  yielded 
considerable  net  income.  May  such  net  income  be  used  to 
pay  dividends,  or  must  it  be  first  applied  towards  making 
up  the  $11, 000,000? 

2.  (a)   Explain  in  full  the  theoretical  difficulties  in  regard  to 

each  of  three  commonly  used  methods  of  distributing 
overhead  burden  in  cost  accounting. 

(b)  Show  how  the  appropriateness  of  each  system  may  be 

affected  by  the  nature  of  the  business  in  which  it  is 
employed. 

(c)  Give  briefly  your  views  on  the  proper  treatment  of  "Idle- 

time." 

3.  Discuss  the  propriety  of  writing  off  goodwill,  giving  your 

reasons  in  full. 

4.  What  are  organization  expenses  ?    How  are  they  to  be  treated 

in  accounts?    At  what  point  do  expenses  cease  to  be  or- 
ganization expenses  and  become  operating  expenses? 
Is  the  deficiency  in  the  early  years  of  a  corporation's  activities 
(whether  an  actual  loss  or  a  deficiency  between  the  earn- 


ings  and  the  normal  rate  of  return)  similar  to  organization 
expenses?  How  should  such  deficiencies  be  treated  in  the 
accounts?  To  what  extent  is  such  a  deficiency  similar  to 
interest  paid  during  construction  ?  Should  such  deficiencies 
be  carried  on  the  balance  sheet?  If  so,  should  they  be 
written  off,  and  how  and  when?  May  the  deficiencies  rep- 
resenting the  difference  between  actual  earnings  and  normal 
rate  of  return  be  capitalized,  in  the  strict  sense  of  having 
capital  stock  issued  to  a  corresponding  sum?  State  clearly 
just  who  is  affected,  and  how,  by  the  different  methods  of 
treating  the  items  mentioned  above. 

5.  Explain  the  relationship  between  a  sinking  fund  and  an  allow- 

ance for  depreciation.  It  is  claimed  that  in  municipal  enter- 
prises the  requirement  that  rates  must  be  high  enough  to 
provide  both  for  a  sinking  fund  to  pay  off  the  bonds  and 
also  for  a  "Reserve  for  Depreciation"  with  which  to  replace 
the  plant  results  in  a  double  charge  to  consumers.  Criticize 
or  explain  this  theory. 

6.  Argument  has  been  strongly  urged  that  aside  from  any  ques- 

tion of  possible  mismanagement,  or  of  the  difficulty  of 
making  satisfactory  investments  to  yield  the  same  rate  as  is 
paid  on  the  bonds,  a  sinking  fund  for  bonds  is  more  expen- 
sive than  an  arrangement  for  the  serial  repayment  of  bonds. 
This  is  illustrated  by  the  case  of  $20,000  5%  bonds.  If 
these  are  paid  off  in  a  series,  one  each  year,  the  total  pay- 
ment made  will  be  principal  $20,000,  interest  $10,500, 
total  $30,500-  The  annual  sinking  fund  to  pay  these  bonds 
would  on  a  5%  basis  amount  to  $604.85,  making  in  twenty 
years  $12,097,  and  the  interest  paid  on  the  bonds  would  be 
$20,000,  total  payments  $32,097.  The  apparent  excess 
burden  is  accordingly  $1,597. 

Discuss  the  above  argument  and  show  clearly  just  what  the 
figures  mean  and  in  what  the  apparent  saving  actually  con- 
sists. 

7.  When  a  corporation  undertakes  its  own  construction  work  on 

what  basis  is  it  permissible  for  it  to  make  charges  to  prop- 
erty account  in  respect  thereof  ?    On  what  basis  would  you 
personally  recommend  that  the  charges  should  be  made? 
Give  your  reasons. 


(a)  How  would  you  deal  in  the  balance  sheet  of  a  corpora- 
tion with  shares  recovered  from  a  vendor  to  whom 
they  had  been  issued  as  fully  paid  and  who  had  re- 
turned them  in  settlement  of  a  claim  for  fraudulent 
misrepresentation  in  respect  of  the  property  sold  by 
him  to  the  corporation  ? 

(b)   How  would  you  deal  with  these  shares  for  the  purposes 
of  a  dividend? 


AMERICAN  INSTITUTE  OF  ACCOUNTANTS 


BOARD  OF  EXAMINERS 


Examination  for  Admission  as  Associate 


Accounting  Theory  and  Practice— Part  I 

JUNE  15,   1917,  9  A.  M.  TO  12.30  P.  M. 

Candidates  are  required  to  answer  questions  one  and 
two  and  one  of  the  remaining  three  questions,  but  no 
more. 

1.    The  firm  of  A  and  B  have  the  following  statement: 

Store   $15,000  Accounts  payable $10,000 

Accounts  receivable 12,000  Bills  payable 5,000 

Cash..... 9,000  A  Capital 30,000 

Furniture  and  fixtures....       2,800  B   Capital 35,000 

Merchandise   37,000 

Miscellaneous  equipment.       4,200 


$80,000  $80,000 

C  is  admitted  as  a  special  partner  with  the  following  arrange- 
ment : 

C  to  contribute  $30,000  and  to  be  entitled  to  one-third  of 
the  profit  for  one  year.  Before  making  the  contribution  the 
following  changes  to  be  made  in  the  books:  store  to  be 
marked  down  5  per  cent;  allowance  for  doubtful  accounts  to 
be  created  amounting  to  2  per  cent;  merchandise  to  be 
revalued  at  $35,000;  furniture  and  fixtures  to  be  valued  at 
$2,500.  At  the  end  the  amount  of  goodwill  is  to  be  fixed  at 
3  times  the  net  profits  for  the  year  in  excess  of  $20,000,  this 
goodwill  to  be  set  up  on  the  books,  the  corresponding  credit 
being  to  A  and  B  equally — A,  B  and  C  each  to  draw  $3,000 
in  cash,  the  remaining  profits  to  be  carried  to  their  capital 
accounts. 


During  the  year  the  following  transactions  took  place: 

Merchandise  bought  on  credit $240,000 

Cash  purchases 25,000 

Cash  sales 125,000 

Sales  on  credit 175,000 

Accounts  payable  paid  (face  $245,000,  discount  2  per 

cent)  240,100 

Accounts  receivable  collected  (face  $170,000,  all  net 

except  $50,000  on  which  2  per  cent  allowed) 169,000 

Buying  expenses,  paid  cash 1,500 

Selling  expenses,  paid  cash 21,000 

Delivery  expenses,  paid  cash 9,000 

Management  expenses,  paid  cash 4,500 

Miscellaneous  expenses,  paid  cash 3,000 

Interest  on  notes  payable,  paid  cash 250 

Partners  each  withdrew  $3,000  cash  as  agreed. 

In  closing  the  books  for  determining  profits  and  goodwill  the 
following  were  agreed  upon : 

Value  of  merchandise  on  hand $60,000 

Depreciation  on  store 285 

Additional  allowance  for  doubtful  debts 165 

Furniture  and  fixtures  written  down 200 

Goodwill  having  been  estimated  and  duly  entered  C  then  con- 
tributes enough  cash  so  that  his  capital  account  equals  just 
one-third  of  the  total  capital. 

Prepare  statements  showing  how  the  accounts  are  to  be  ad- 
justed and  the  balance  sheet  after  the  final  adjustment. 

2. 

BALANCE  SHEET  OF  AB 

Real  estate $140,000.00      Capital   $229,652.00 

Equipments 75,150.00  Mortgages    on    real 

Patents  54,700.00          estate   75,000.00 

Investments  33,500.00       Accounts  payable 124,615.24 

Cash   4,348.64       Notes  payable 80,000.00 

Notes  receivable 2,479.75  Reserve   for  deprecia- 

Accounts   receivable..  31,108.15          tion 821.00 

Inventories   81,423.70 

Goodwill 40,000.00 

Trading  losses 47,378.00 


$510,088.24  $510,088.24 


AB,  whose  balance  sheet  appears  above,  having  been  unfor- 
tunate in  business,  goes  into  liquidation.  Prepare  statement 
of  affairs  and  deficiency  account. 

The  real  estate  is  valued  at  $90,000,  the  equipment  at 
$30,000.  The  patents  are  considered  worthless,  with  the  ex- 
ception of  one  thought  to  have  a  market  value  of  $5,000. 
Bonds,  with  a  par  value  of  $27,500,  were  pledged  to  secure  a 
collateral  loan  of  $25,000.  These  have,  however,  shrunk  in 
value  so  as  to  be  worth  at  present  prices  only  $22,000.  In- 
cluded in  investments  are  $5,000  other  bonds  which  are 
clearly  worthless;  the  other  investments  have  a  doubtful  value 
of  50  per  cent.  The  notes  receivable  are  thought  to  be  good. 
Of  the  accounts  receivable  $10,000  are  known  to  be  good, 
$5,000  are  known  to  be  bad,  and  the  remainder  are  expected 
to  pay  80  per  cent.  The  inventories  are  estimated  as  worth 
not  more  than  half  of  their  book  value.  Goodwill  is  purely 
fictitious.  Interest  accrued  on  the  mortgage  is  $800,  on  notes 
payable,  $523.  Wages  accrued  are  $1,200. 

Assuming  the  foregoing  estimates  of  value  are  correct  and 
the  expenses  of  liquidation  amount  to  $3,000,  what  per- 
centage of  their  claims  will  the  general  creditors  receive? 

3.  A  company  organized  with  $1,000,000  capital  stock  which  it 

placed  at  par,  and  $1,000,000  5  per  cent  bonds  which  it  sold 
at  90,  this  being  a  6  per  cent  basis.  It  paid  to  contractors, 
etc.,  for  construction  $1,800,000  and  this  amount  of  invest- 
ment ran,  on  the  average,  for  one  year  before  the  property 
was  ready  for  operation.  When  operation  began  the  com- 
pany had  therefore  paid  one  year's  interest  on  the  issue  of 
bonds.  No  dividends  were  paid  on  the  stock.  In  addition 
to  the  sum  named  above  the  company  also  paid  $10,000  for 
legal  expenses  in  connection  with  incorporation  and  $5,000 
for  franchise  and  other  fees. 

How  should  the  accounts  appear  when  the  property  was  ready 
for  operation  ? 

4.  A  corporation  having  issued  its  capital  stock  at  par  buys  1,000 

shares  at  95.  It  later  sells  500  of  these  shares  at  98,  and 
300  at  85,  and  200  at  101.  Give  the  journal  entries  covering 
these  transactions. 

How  should  the  items  appear  on  the  balance  sheet  imme- 
diately after  purchasing  the  stock,  and  immediately  after 
each  of  the  sales? 


5.    The  following  items  represent  the  combined  statement  of  all 

the  national  banks.     Rearrange  them  in   the  form  of   a 

balance  sheet.  You  need  not  follow  the  form  used  by  the 
Comptroller  of  the  Currency,  but  make  a  balance  sheet  in 
the  form  that  seems  the  most  desirable. 

Banking  house,  furniture  and  fixtures $160,800. 

Bills  of  other  national  banks 31,200. 

Bills  payable 44,700. 

Bonds  borrowed  60,000. 

Bonds,  securities,  etc 700,300. 

Capital  stock  paid  in 896,400. 

Cashier's  checks  outstanding 1,000. 

Certified  checks 1,000. 

Checks  and  other  cash  items 26,900. 

Circulating  notes 551,900. 

Demand  certificates  of  deposit 1,000. 

Deposits  of  U.  S.  disbursing  officers 17,800. 

Dividends  unpaid 1,600. 

Due  from  approved  reserve  agents 614,500. 

Due  from  other  national  banks 334,600. 

Due  from  state  banks 123,000. 

Due  from  the  Treasurer  of  the  U.  S 4,700. 

Due  to  approved  reserve  agents 38,100. 

Due  to  other  national  banks 823,000. 

Due  to  state  banks 395,800. 

Due  to  trust  companies 337,900. 

Exchanges  for  the  clearing  house 190,600. 

Fractional  currency 2,300. 

Individual  deposits  subject  to  check 4,315,000. 

Lawful  money  reserve  in  banks 701,600. 

Loans  and  discounts 4,678,600. 

Notes  and  bills  rediscounted 14,400. 

Bonds  (other  than  U.  S.)  to  secure  U.  S.    deposits.. .  68,200. 

Other  liabilities  6,900. 

Real  estate  owned  other  than  banking  house 20,200. 

Overdrafts 30,500. 

Premium  on  bonds  for  circulation 14,600. 

Redemption  fund  with  the  U.  S.  Treasurer 27,300. 

Reserve  for  taxes 4,400. 

State  bank  circulation  outstanding 100. 

Surplus  fund  548,300. 

Time  certificates  of  deposit 1,000. 

Undivided  profits 186,600. 

U.  S.  bonds  on  hand 7,400. 

U.  S.  bonds  to  secure  circulation 557,300. 

U.  S.  bonds  to  secure  U.  S.  deposits 95,600. 

U.  S.  deposits •  •  143,300. 


AMERICAN  INSTITUTE  OF  ACCOUNTANTS 


BOARD  OF  EXAMINERS 


Examination  for  Admission  as  Associate 


Accounting  Theory  and  Practice — Part.  II 

JUNE  15,  1917,  1.30  P.  M.  TO  4.30  P.  M. 

Candidates  are  required  to  answer  six  of  the  following 
questions  but  no  more. 

1.  In  the  process  of  consolidating  several  competing  establish- 

ments, Corporation  A,  the  holding  company,  acquires 
$98,000,  out  of  a  total  of  $100,000,  of  the  capital  stock  of 
Company  B.  At  the  time  of  the  purchase  the  balance 
sheet  of  Company  B  showed  surplus  and  undivided 
profits  of  $50,000.  Company  A  bought  the  stock  of  B  at 
200%.  Almost  immediately  after  the  purchase  Company 
B  paid  a  cash  dividend  of  25%.  In  what  ways  would  the 
payment  of  this  dividend  affect  (a)  the  balance  sheet  of 
B;  (b)  the  balance  sheet  of  A;  (c)  the  consolidated  bal- 
ance sheet  of  A  and  its  subsidiary  companies  ? 
Give  your  reasons  for  your  answer. 

2.  The  balance  sheet  of  a  corporation  shows  the  following  credit 

balances : 

Reserve  for  depreciation 
Reserve  for  extension  of  plant 
Reserve  for  bad  and  doubtful  debts 
Sinking  fund  reserve 
Insurance  reserve 
Reserve  for  pensions 
Reserve  for  contingencies 
Reserve  for  taxes 

What  would  you  assume  to  be  the  nature  of  each  of  these 
items?  Can  better  terms  be  substituted  for  any  of  those 
used?  In  what  circumstances  would  each  of  the  above  ac- 
counts be  debited,  and  when  debited  what  would  be  the 


corresponding  credit?  If  the  business  were  to  be  sold  for 
the  amount  of  its  net  worth  as  shown  by  the  balance  sheet 
which  of  these  items  would  represent  a  proper  addition  to 
the  capital  stock  in  determining  the  selling  price? 

3.  A  machine  costing  $10,000  was  estimated  to  have  a  life  of 

ten  years,  with  a  residual  value  of  $1,000.  At  the  close  of 
each  year  a  charge  of  $900  was  made  and  a  similar  amount 
credited  to  "Reserve  for  Depreciation."  Just  prior  to 
closing  the  books  at  the  end  of  the  tenth  year  the  machine 
was  discarded  and  sold,  bringing  $2,000,  and  a  similar  ma- 
chine was  bought  costing  $15,000.  Give  the  journal  entries 
that  you  would  make  to  close  the  books  at  the  end  of  the 
tenth  year  in  order  to  cover  these  transactions  and  to  make 
necessary  adjustments.  Interest  is  not  to  be  calculated. 

4.  How  should  the  following  items  be  treated  in  the  balance 

sheet : 

Notes  receivable  endorsed  and  discounted  at  a  bank; 

Accommodation  endorsements  made  for  friends; 

Contracts  for  future  delivery  at  a  stated  price,  the  work  being 

in  part  completed,  and  in  part,  but  to  a  smaller  percentage, 

paid  for: 
Guarantee  given  that  machinery  sold  will  last  five  years? 

5.  A  company  is  under  obligations  to  pay  $10,000  to  sinking 

fund  trustees  "out  of  profits."  The  following  transac- 
tions take  place. 

1914 

Dec.  31  $10,000  cash  paid  to  sinking  fund  trustees. 

1915 

Jan.      5  Trustees  invest  in  $10,000  of  the  5  per  cent  bonds  of 

the  company  at  98  and  interest  (from  Jan.  1). 

July     1  Coupons  on  above  bonds  collected. 

Dec.  31  $10,000  paid  to  sinking  fund  trustees. 

1916 

Jan.      1  Coupons  collected. 

2  $11,000  bonds  bought  for  sinking  fund  at  95. 

July     1  Coupons  collected. 

Dec.  31  $125  paid  for  expenses  of  sinking  fund. 

31  $10,000  paid  to  sinking  fund  trustees. 

1917 

Jan.      1  Coupons  collected. 

Jan.    10  $10,000  bonds  bought  at  101  and  interest. 


<r 


Give  the  journal  entries  on  the  company's  books  for  the  above 
transactions. 

6.  A  company  which  keeps  no  perpetual  inventory  records  but 

takes  an  inventory  annually  on  Dec.  31,  suffers  a  fire  loss 
on  March  1.  How  would  you  proceed  to  compute  the  in- 
ventory on  hand  at  that  date  ? 

7.  In  preparing  a  balance  sheet  of   a  corporation  how  would 

you  classify  or  deal  with  securities 

(a)  representing  the  entire  ownership  of  a  plant. 

(b)  representing  an  interest  in  a  competing  company. 

(c)  representing  the  investment  of  a  sinking  fund. 

(d)  representing  the  investment   of   a   temporary   surplus    of 

cash. 

(e)  stocks  or  bonds  issued  by  the  company  itself? 

8.  What  are  the  main  objects  to  be  sought  in  arranging  the  dis- 

tribution of  the  work  of  the  treasury  and  accounting  de- 
partments of  a  business?  "WJhat  general  lines  of  distribu- 
tion would  you  adopt  to  attain  these  objects? 

(Candidates  are  not  expected  to  explain  methods  in  detail 
or  draw  forms). 


UNI 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  SO  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.OO  ON  THE  SEVENTH  DAY 
OVERDUE. 


MAR     4    1938 


&J£-^, 


JUL9   1957 


LD  21-95m-7,'37 


Cayford  Bros. 

Mak«r» 

Syracuse.  N.  Y. 
PAT.  JAN.  21,  IM 


°970 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


